Allin Cottrell:
Thanks for the empirical information.
peace, patrick
At 11:29 PM 4/22/01 -0400, you wrote:
>On Tue, 17 Apr 2001, Gerald_A_Levy wrote:
>
> > * What, if anything, is different about the current
> > bubble in the U.S. stock market?
>
>What bubble? I'm teaching econometrics this semester, and to
>illustrate the "error correction" model specification I ran an error
>correction model of the Dow-Jones average, using quarterly data,
>1959-2000. I hypothesized that in equilibrium the Dow ought to be
>proportional to the value of an annuity defined as the value of
>after-tax corporate profits divided by a suitable long-term interest
>rate (i.e. the present value of the hypothetical stream of current
>profits, maintained indefinitely). The model gave an equilibrium
>proportionality factor of about 0.90 -- i.e. the "right" value for the
>Dow index is about 90% of the present value of the corporate profit
>stream, in billions of dollars. We're currently just about at that.
>For most of the 1990s the Dow was below equilibrium, and busy catching
>up.
>
>Allin Cottrell.